3 Strategies CPG Brands Can Use to Avoid the CRaP List & Be Profitable on Amazon

Share

Newsflash, CPG brands! You don’t have the leverage with Amazon anymore. It’s true, Amazon doesn’t want to lose your top-selling products, but that doesn’t mean it wants to sell your “CRaP” either. Amazon is now focused on profitable expansion, meaning it is only interested in supporting and building its retail merchandising strategy around profitable products.

The rest of the slack can be picked up by its over one million third-party sellers, who accounted for over half of Amazon’s 2018 revenue. As a result, the company has begun to take aggressive action toward products that are structurally unprofitable for it to source and sell, sending warning letters to vendors and even removing listings from the platform.

By nature, CPG products are the most vulnerable for ending up on Amazon’s “CRaP” (“Can’t Realize a Profit”) list. This is due to their low per-unit prices and associated hefty shipping costs, which create a low to nonexistent margin environment.

The main goal of any CPG brand selling on Amazon should be to stay off the “CRaP list.” To eliminate the chances of even getting a warning letter from Amazon, brands need to employ serious strategies that proactively address potential profitability problems with Amazon.

#1: Deploy Hybrid Selling Model 2.0

With a hybrid selling model, brands both sell to Amazon as a first-party vendor (1P) and on Amazon as a third-party seller. This approach is beneficial to brands, as Vendor Central and Seller Center each have their own mutually exclusive advantages:

Amazon Vendor Central: Lower fees and more advanced marketing tools

Amazon Seller Central: Greater control of pricing, inventory and analytics

For CPG brands, the hybrid model provides an opportunity to act as a nimbler seller and minimize lost sales. As a vendor, it can be difficult to smooth unstable supply chains from spikes in demand, quickly launch new products and seasonal items, and sell items that are structurally unprofitable in the wholesale model.

The hybrid model was pivotal for the growth of CPG brands until Amazon adjusted its Seller Central guidelines in 2018. According to Amazon, “if any of the [Vendor’s] Brand’s products are sold by Amazon, the Brand may not also sell those products as a Seller in the Amazon store.” This has created additional challenges for CPG brands. Though the enforcement has been low (just as the CRaP list was until late last year), it doesn’t mean that an alternative strategy shouldn’t be prepped for this policy change.

This alternative strategy is what I have been calling the Amazon Hybrid Model 2.0. The Amazon Hybrid Model 2.0 allows a brand to pick a trusted exclusive retail partner (or vertically-integrated distributor) to list the same products that are sold on Vendor Central on Seller Central. This new hybrid model 2.0 could be structured in a manner to fully exercise the advantages of the original hybrid model but still comply with Amazon’s new policy.

#2: Distribute Resources to Organic Search

If you’re a CPG marketing professional, chances are you have intentions to increase your Amazon Marketing Service (AMS) budget in 2019. Because of that, it’s important to understand the effects of spending on demand drivers that increase sales of listings that are close to landing on the CRaP list. In this scenario, it’s like throwing gasoline on a campfire and creating a bonfire of harsh impacts to your business.

Before CPG marketing professionals dump major money into Amazon advertising spend, they need to be well versed in how Amazon controls vendor pricing and how its pricing algorithm works. Since Amazon controls retail pricing for vendors, its pricing algorithm will match the lowest available price for the same SKU from other online retailers. With CPG products traditionally having a low average selling price, a price adjustment of even just one dollar can make a product unprofitable for Amazon.

Because of that, Amazon has been known to pause or terminate AMS ad campaigns for products that do not meet what it calls the “financial threshold.” If you continue to drive more sales from paid demand drivers to items that are unprofitable for Amazon, eventually you’ll hit this threshold on your Amazon buyer’s report, and your almost CRaP product will turn into an actual CRaP product, and Amazon will eventually stop ordering from you.

Instead, CPG brands should distribute these resources to enhance their organic search visibility, allowing for a more controlled, sustainable and profitable growth. To maximize search visibility, start by compiling a list of relevant keywords you want your products to rank for. These should include both broad and specific terms, as well as branded and unbranded keywords, and they must be relevant to the products.

#3: Create Digitally-optimized Offerings

One of the most common mistakes CPG brands make is that they believe physical retail success can be directly and easily translated into online success. This misunderstanding leads to brands selling the exact same pack sizes and product configurations online as they do offline. Often, this results in major problems in relation to margin. A re-examination of your e-commerce offerings from all angles is a key strategy to consider for maximum profitability on Amazon.

Larger pack sizes: Increasing pack sizes can help create better unit economics, but there could be counter effects if you go “too large” with some items. Those counter effects occur when pack sizes are larger than a customer’s usage rate. The usage rate of a CPG product is the main variable to consider when it comes to increasing pack sizes. According to Nielsen’s June 2018 Total Consumer Report, consumers have a tendency to purchase FMCG products in bulk online, which has likely driven the 7.3% growth YOY in units purchased per trip (the highest of any channel), while dollars spent per trip have fractionally contracted.

Bundles: Just as you can create larger pack sizes, you can also create bundles to help spread shipping costs. These could be multipacks of the same product or variety packs of different flavors or other variants.

Exclusive products: Creating “Amazon Exclusive” items mitigates any risk of those products being price matched to another retailer’s listings. This allows brands to focus on shipping profitability and less on managing third-party seller competition, causing downward pricing pressure.

Packaging:Optimizing your product packaging for e-commerce helps reduce wholesale and logistics costs for Amazon, leaving more room for margin. Consider updates to packaging that make it easier (and cheaper) for Amazon to stock, fulfill and ship your products to customers.

Joshua Schall, MBA has an 11-year background in the emerging and intersecting CPG/FMCG categories of functional food and beverage and nutritional products.

He currently is the owner of J. Schall Consulting, an Austin, TX-based boutique management consulting company that focuses on digital growth strategies for CPG/FMCG brands that range from pre-launch to portfolio companies with $500M in yearly revenue.

Joshua enjoys an active healthy lifestyle but still finds himself spending way too much time scanning social media and digital grocery aisles for new consumable brands.

The top 3 search results on retailer websites receive 70% of clicks and 30% of conversions.